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Archive for August, 2009

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BU Antitrust Conference Honoring Professor Joseph Brodley's Retirement

Posted by Josh Wright on August 19, 2009

Professor Joe Brodley, after a long and distinguished career as an antitrust scholar, retired at the end of the Spring 2009 semester. Boston University Law School will host a symposium honoring Joe’s contributions to Antitrust on September 18, 2009. The Boston University Law Review will publish the contributions.

The symposium will consist of three panels. The first will focus on Joe’s contributions. Panelists will reflect on Joe’s work, on their own work with Joe, on his contributions to the field, or on how his papers may have influenced their work.

The second panel, a transition between between the first and third, will address topics that Joe wrote about: predatory pricing, joint ventures, mergers, antitrust standing, oligopoly, patent settlement, and the goals of antitrust law.

The third panel will focus on the future, specifically what direction antitrust should take in the new administration.

The conference schedule is as follows:

First Panel: 9:30 to 10:45

Eleanor Fox

Richard Brunnell

Hillary Greene

Second Panel: 11:00 to 12:15

Dennis Yao

Richard Dagan

Michael Salinger

Patrick Bolton (paper only)

Lunch: 12:30 to 2:00

Last Panel: 2:00 – 3:15,

Einer Elhauge

William Kovacic

Herbert Hovenkamp (paper only)

Response from Joe Brodley

For more information, please contact Professor Keith Hylton (knhylton@bu.edu).  If you plan to attend, please contact Mary Gallagher (marykg@bu.edu).

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Thaler’s Unsound Argument About the Public Insurance Option

Posted by Thom Lambert on August 19, 2009

University of Chicago economist (and behavioralist doyen) Richard Thaler thinks “the question of whether a ‘public option’ should be part of the health care solution” is just “one big distraction.” In Sunday’s New York Times, Thaler argues that the debate over the public option is a “red herring” if, as President Obama insists, the public plan will have to break even and won’t be granted “the power to impose special deals with suppliers like hospitals and drug companies.” If those two conditions are satisfied, Thaler contends, the public plan is unlikely to have much success and certainly won’t drive out private insurers.

In setting forth his case, Thaler takes a page from the President’s own playbook, drawing a comparison to the U.S. Postal service and its private sector competitors:

[L]et’s assume that the public option does have to break even and can’t make any special deals. What should we expect to happen? Here is a thought experiment: Can you think of a domain where a government-run business competes successfully with private-sector companies? In a town hall meeting last week, President Obama mentioned one such example: the market for overnight shipments. This market now has two main private suppliers, FedEx and UPS, and one public one, the United States Postal Service. When you have to send something overnight, which one do you use? Most shippers choose one of the private companies.

It’s certainly a puzzling analogy for the President to draw. If we needn’t worry about the public option driving out private insurers because, well, it’s likely to suck as bad as the post office, then why create it in the first place? Thaler, though, isn’t trying to defend the public option. Instead, he’s just saying that it’s unlikely to do any harm if the plan really has to break even and won’t have the power to coerce special deals from providers.

The problem is that those are remarkably big ifs. In fact, they’re simply incredible. With respect to the first assumption, does anybody believe that Congress would let the public plan fail? If you do, you might want to read up on Fannie Mae and Freddie Mac, those other government-created enterprises that Congress insisted would have to stand on their own. Or you could look at the Postal Service itself. As Thaler concedes, “When [the Postal Service] periodically starts running deficits (as it is now) and proposes cost-saving measures like eliminating Saturday delivery or closing tiny post offices, Congress often intervenes [i.e., subsidizes] under pressure from predictable interest groups like bulk mailers, the 600,000 postal employees, and the users of those tiny offices.” Congress simply isn’t going to let the Post Office — or Fannie Mae, or Freddie Mac, or any public health insurance plan — fail. It will always step in and save the public plan from what are bound to be termed “extraordinary circumstances.” And because of this, the public option will have a huge advantage over private insurance plans, which really do have to stand on their own.

What’s more, the fact that all sensible people know that Congress will never let the public plan fail will give the plan a notable advantage over its private competitors in raising capital from private sources. Again, look no further than Fannie and Freddie for evidence of this phenomenon. Those entities have long had a capital-raising advantage, given that Wall Street knew they’d never be allowed to fail.

These explicit and implicit government subsidies promise to give the public option cost advantages that will permit it to charge lower premiums and steal the lion’s share of the health insurance market. Thus, the Lewin Group predicts that 70 percent of the 172 million privately insured Americans would convert to the public plan.

Given that outcome, Thaler’s second assumption — that the public option won’t be empowered to cut special deals — is similarly unfounded. Even if the legislation doesn’t give the public plan express power to negotiate special deals, such deals are inevitable. Once the bulk of Americans convert to the public plan, that plan will have serious bargaining advantages that stem from its monopsonist status. Monopsony power is simply the flip-side of monopoly power. Whereas a monopolist (a dominant seller) has the power to drive prices above cost (by withholding its output), a monopsonist (a dominant buyer) has the power to drive prices beneath sellers’ costs (by withholding its purchases).

While an exercise of such power might benefit some consumers, at least in the short term, the long-term effects would be quite negative. Forced to price below their costs, health care providers would quickly begin to cut all expenses unrelated to the immediate provision of services. Most notably, they would cut research and development expenditures, leading to reduced health care innovation. Because the United States is the dominant source of the profits that fund health care R&D worldwide, this would be disastrous.

As John Calfee recently explained in the Wall Street Journal:

The U.S. is unique because it alone is the source of half of world-wide profits that provide the payoff for the complex, lengthy, and expensive process of developing new treatments. When other nations construct their health-care systems, they ignore the impact of their pricing policies on R&D incentives. As the dominant R&D funding wellhead, we do not have that option.

Competitive markets have generated the prices and the profits necessary to induce a steady flow of medical innovation in this country. A public plan option would tend to dismantle that system. The people in charge will not know how to set reimbursement levels to motivate reasonable R&D efforts, and there is no reason to expect them to try. In public plans, the tried-and-true method is to push the prices of suppliers down until something gives — too few doctors willing to take on Medicare patients, for example — and then to ease up. That is a destructive approach to medical technology R&D.

Who knows what drugs will not be developed if reimbursement levels for a new multiple-sclerosis treatment are too measly? In virtually every advanced economy but our own, pricing authorities simply make sure prices are high enough so that existing drugs continue to be made available. We can expect a public plan here to do the same. The inevitable result is to drastically under-incentivize R&D.

In the end, Professor Thaler’s clever argument that the public option isn’t a big deal is based on incredible assumptions. To use the language of logical reasoning, the argument may be valid (in that the conclusion flows from the premises), but it’s unsound (in that the premises are wrong). The public option is a huge deal that should be an absolute deal-breaker.

Posted in business, economics, markets, politics | 2 Comments »

Some Links …

Posted by Josh Wright on August 18, 2009

  • There was a lot of backdating … yawn… oh, and Brett Favre is coming back
  • The WSJ editorial page thinks the liberal boycotts of Whole Foods in response to CEO John Mackey’s op-ed on health care reform won’t have any real effects because because “real protest would require the store’s hyperprogressive customers to withdraw forever from the Whole Foods community to get their artisanal foods at the supermarket chain down the block”; the WSJ editoral page also thinks that the FTC antitrust challenge of the Whole Foods/ Wild Oats merger was silly because the a price result would result in consumer switching to other supermarkets
  • Oesterle on Jones v. Harris: is the most dynamic battle here the role of Jones v. Harris in the executive pay wars?  The Posner v. Easterbrook angle?  Neoclassical v. behavioral economics?  More from Professor Bainbridge.
  • “The right economists arestill not as good as the right sociologists” … Sociologists want a seat at the table in the White House.  Peter Klein submits at least one of the appropriate objections: “One sociologist thinks economists downplay race and gender — “their supply and demand curves don’t deal with these questions” — which is silly, as much of the analysis of subprimes by labor economists focuses exactly on this. I’m not claiming that sociology (or anthropology or history or psychology) has no useful policy implications, of course, only asking for specifics.”

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The New Issue of Antitrust Source

Posted by Josh Wright on August 14, 2009

Is available here.

In this issue Chris Sagers considers the future of Section 1 in light of the Supreme Court’s possible action in American Needle. Continuing our focus on China, this issue features an article by Nate Bush that examines merger enforcement activity under that country’s year-old Antimonopoly Law. Still on mergers, but on the domestic front, Timothy Daniel looks back at Bush administration enforcement to see if there are any lessons the Obama administration might draw. Finally, a particularly interesting Paper Trail reviews recent scholarship on sports standards-setting bodies and the FTC’s evaluation of efficiencies.

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Questioning the UK Competition Commission Ombudsman Plan

Posted by Josh Wright on August 12, 2009

In April 2008, the UK Competition Commission issued its Final Report culminating from its grocery sector inquiry.  Along with supermarket concentration, the concern that emerges out of that Report is that supermarkets will use their power to negotiate sharp deals with suppliers.  For example:

In emails from store buyers seized during its investigation, the Commission found evidence of foul language towards suppliers together with demands for retrospective discounts and payment for stock lost or damaged after delivery.  Business Secretary Peter Mandelson will decide whether to implement the recommendation, which came in the face of steadfast opposition by the Big Four store chains, Tesco, Asda, Sainsbury’s and Morrisons.  The British Retail Consortium, which represents the chains, accused the watchdog of imposing a £5m a year scheme that was likely to lead to higher costs for shoppers.  Groups representing suppliers, including the National Farmers Union, welcomed the recommendations and called for their swift implementation.

The Competition Commission now has a new recommendation to arbitrate disputes in vertical contractual relationships between manufacturers and retailers, presumably over things like product allocation, pricing and shelf space decisions to alleviate fears of the exercise of buyer power in these relationships (again from the Independent):

var articleheadline = “Grocers face price check: Are supermarkets abusing their immense buying power”;

A key recommendation was to establish an ombudsman to police relations between the big grocers and suppliers, in an effort to stamp out alleged cases of bullying or the supermarkets allegedly abusing their immense buying power. The commission, which does not have the power to introduce an ombudsman itself, sought the agreement of supermarkets for this. But most have vehemently opposed the idea, arguing it would add red tape and costs, which would be passed on to customers.

Yesterday, the commission bared its teeth and formally recommended to Lord Mandelson’s Department for Business, Innovation and Skills (BIS) that it should establish an ombudsman to arbitrate on disputes between grocers and suppliers, under the terms of the new Groceries Supply Code of Practice (GSCOP). The new code will come into effect on 4 February 2010, replacing the hitherto voluntary code that the big four grocers signed up to. The ombudsman and GSCOP applies to the 10 grocers with annual turnover of more than £1bn: Tesco, Asda, Morrisons, Sainsbury’s, Aldi, Lidl, Waitrose, The Co-operative Group, Iceland and Marks & Spencer.

The Ombudsman seems like quite an odd remedy to me for solving so-called “problems” believed to arise from vertical contractual relationships.  Of course, “problems” arise whenever two sides to a negotiation would like a greater share of the pie.  Sometimes negotiations are fierce.  Sometimes the contractual instruments that arise out of these negotations are complex and involve sharing of rents in exchange for promotional activity, monitoring, and self-enforcement mechanisms.  Monitoring and maintenance of these relationships can be fluid, complex, profitable, and good for consumers.

The Final Report recognizes the benefits that arise from the negotiations between suppliers and retailers such as extraction of discounts that are passed on to consumers (though in my view does not sufficiently appreciate the benefits of that retail exclusivity can have in terms of intensifying competition for distribution — nor the economic benefits of promotion more generally) but articulates a concern that these negotations will result in the passing on of “excessive risks” or “excessive costs” to suppliers.  Why an Ombudsman is well situated to determine what is an excessive allocation of risk or costs to suppliers in this setting, which generates complex distribution arrangements such as slotting contracts and category management arrangements, escapes me.  It seems to be the most likely outcome of this portion of the plan is to raise costs to consumers by encouraging both sides of the negotation to lobby the Ombudsman in favor of their respective positions and affect the terms of trade rather than than engage in the sometimes tough (and yes, sometimes even involving foul language!) negotations with collaborators in the supply chain.

Posted in antitrust, business, economics | Comments Off

EU Intel Fines Attract Rebuke

Posted by Josh Wright on August 11, 2009

I’ve criticized the European Commission’s antitrust attack against Intel here and the resulting $1.44 billion fine.  Now the EU is drawing fire for allegedly burying testimony, or at least failing to record it in a satisfactory manner, from Dell that it chose Intel’s chips not because of the coercive force of any of Intel’s rebates but because it preferred the performance of those chips over AMD’s product offerings.  Part of the problem here is that the EU’s 542 page  decision remains confidential and so it is impossible to tell what kind of impact this testimony would have on the issue of liability — and indeed the WSJ story sensibly suggests that there is little reason to believe that disclosure of this evidence would have changed the outcome.  The WSJ story concludes by taking a swing at EU procedure:

The entire EU antitrust regime—in which the Commission can assess guilt without any semblance of a trial or the involvement of an independent judge or jury—is an affront to any reasonable notion of due process. Deliberately withholding exculpatory evidence is, and should be, grounds for retrial, and not merely a sympathetic report from a toothless Ombudsman.

It now falls to the EU’s Court of First Instance, to which Intel has appealed, to offer Intel redress. The Court may not have jurisdiction to give the Commission’s discredited antitrust theories the thrashing they deserve, but it can, at a minimum, stand up for the rights of the accused when they are trampled by Europe’s antitrust cops.

But to return to the liability issue for a moment, I think it is easy to understate the importance of this evidence from Dell in light of the 542 page Commission opinion by assuming it would have minimal weight.  Indeed, that is likely true under EU law where Intel’s loyalty rebates with other OEMs would likely be sufficient to establish a violation. In that sense, the failing to disclose or record the exculpatory Dell testimony is likely to be “harmless error” only in the sense that it would not have impacted the liability ruling under Article 82 jurisprudence — but the error is obviously far from harmless in terms of calculating appropriate fines and from a procedural perspective.

But from an economic perspective, recall that the anticompetitive theory underlying the investigation is that Intel uses these loyalty rebates, conditioned on exclusivity, to foreclose its rival AMD from sufficient access to distribution to achieve minimum efficient scale.  In other words, the rebates result in de facto exclusivity that deprives AMD of efficient scale, raises its costs, and allows Intel to maintain its monopoly power in the microprocessor market.  A key part of that story is that AMD cannot compete on the merits for distribution because it is foreclosed.  In the United States, a key analytical issue (in addition to whether any of the rebates resulted in below cost pricing, presumably under Brooke Group or some attribution test) is whether the distribution contracts foreclosed ENOUGH distribution to have an effect on competition.  In this analysis, how the Dell business figures into the competitive analysis could be a very big deal.  While Dell is just a single buyer, the OEM market is relatively concentrated with a handful of large buyers.  Evidence that AMD was not foreclosed from Dell sales — or could have competed for those sales and earned them on the merits with an equivalent product — would be incredibly important (and tends toward a finding of no liability) under Section 2 analysis and conventional exclusive dealing/ exclusionary contract analysis generally.

Posted in antitrust, economics | Comments Off

Antitrust Anachronism? Randy Picker on the Microsoft-Yahoo Search Deal

Posted by Josh Wright on August 8, 2009

I recently commented on Gordon Crovitz’s WSJ column on the Microsoft-Yahoo deal arguing that antitrust was simply too cumbersome to deal competition issues in dynamic markets like search.  A short version of my take was that these concerns are often overstated in the areas of cartels and even sometimes in merger enforcement — but have their greatest bite in single firm conduct cases involving innovative markets where economic technology for detecting anticompetitive conduct is at its weakest and the stakes are highest.  Randy Picker (Chicago) chimes in on the Crovitz piece with an interesting take and a call for even-handed application of claims that antitrust is obsolete:

This misses of course one key point: absent antitrust review of search deals, this deal would not be taking place. This deal is only possible because the prior proposed deal between Google and Yahoo!—a 1-2 deal—was effectively blocked by precisely the same antitrust review process that Crovitz decries. (Disclosure: I consulted for the opposition to the Google—Yahoo! deal.) Absent that review, Google and Yahoo! would have done their deal and Microsoft would have been left on the sideline.

You can criticize whether the regulators should have blocked the Google-Yahoo! deal. That view would seem consistent with most of what Crovitz says about the difficulties of regulating these highly dynamic markets and the hope that Schmupeterian competition will suffice. But what we cannot do—and this I think is the error implicit in Crovitz’s piece—is to criticize the business review process for Microsoft—Yahoo! when it was precisely that process for Google-Yahoo! that made the new deal that Crovitz likes possible. Do reviews, don’t do reviews, but no selective criticism of this review without acknowledging the role that the review process played in creating the foundation for this deal. No reviews at all would have meant Google-Yahoo!, not Microsoft-Yahoo!.

Go read the whole thing.

Posted in antitrust, economics, google, mergers & acquisitions, technology | Comments Off

FTC Office Policy and Planning Fights for Competition in the Dental Services Market

Posted by Josh Wright on August 7, 2009

Having just had four wisdom teeth pulled this morning at age 32, about ten years after the dentist first recommended it, the dental services market is on my (anesthesia fogged) mind this afternoon.  But it reminded me of a post I wanted to write highlighting the efforts of the FTC Office of Policy and Planning for their latest comments (a few months old, but worth noting) to the legislature of Louisiana on a pending bill (HB 687) that would restrict competition and entry in the dental market in that state.  The FTC has a long history of competition policy advocacy efforts and much of those efforts are aimed at commenting on state barriers to entry and policies that will harm consumers.  The FTC’s comments are available here and here.  I’m quoted in Chairman Kovacic’s FTC at 100 Report as describing allocation of resources to these efforts as a “no brainer.”  And I think that’s right.  Some of the lowest hanging fruit for improving consumer outcomes through competition policy are generated from the elimination or discouragement of state imposed barriers to entry.  New Director Susan Desanti (who was kind enough to agree to participate in our last GMU/Microsoft conference on incredibly short notice!) has continued the tradition of the OPP fighting the good fight in this area.

Posted in antitrust, federal trade commission | Comments Off

Trends in Protectionism

Posted by Josh Wright on August 6, 2009

Here’s a troubling paragraph from Chad Bown’s WSJ op-ed:

The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.  This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.

Posted in economics, international trade | Comments Off

Antitrust, Obsolescence and the "New Economy" (Again)

Posted by Josh Wright on August 4, 2009

Gordon Crovitz (WSJ) plays the new economy card on antitrust.  Its a familiar wrap for those in the antitrust community that hit its peak in the original Microsoft days with virtually every competition policy scholar and commentator chiming in with an opinion about whether the internet and network effects and so forth rendered antitrust obsolete.  Analyzing the Microsoft case is a bit of an antitrust Rorschach test nowadays with critics of antitrust in the modern economy viewing the Microsoft prosecution in the U.S. as disastrous and likely harmful to consumers, more moderate (but still skeptical) folks believing that the prosecution was a Quixotic and not likely to affect competition or consumers because antitrust was simply too slow to respond in dynamic markets, and proponents pointing to it as proof of antitrust’s modern relevance.  The best analysis I’ve read of the Microsoft saga, and one I recommend to anybody interested, is Page and Lopatka’s The Microsoft Case (Chicago Press).

That’s not to say there is nothing to the critique that antitrust is too slow to deal with innovative and dynamically changing markets.  There is certainly something there.  But there are at least two different criticisms one could level at the antitrust enterprise as applied to innovative markets.  One is institutional, i.e. conditional on believing that we can accurately and confidently identify anticompetitive behavior in these markets, competition enforcers cannot hope to prosecute it and install remedial measures before the market they were attacking is gone and the next big thing has arrived.  This is the angle Crovitz is pushing:

The bottom line is that by the time regulators can assess a technology market, the market has often moved on. Not long ago, Google was the upstart and the search leaders included names like AltaVista and Excite. “Regulatory intervention in the high-tech sector thwarts the natural evolution of the market,” argues Wayne Crews of the Competitive Enterprise Institute. “Worse, it distorts the response of competitors. Antitrust investigations steer the market in unnatural directions, creating instabilities in entire industry sectors.”  The antitrust laws are anachronisms when applied to industries of constant innovation. Even theories about the role of antitrust were designed for the industrial era.

For antitrust skeptics who make this institutional argument, the Microsoft case is exhibit 1:

Haven’t antitrust regulators learned from the experience battling Microsoft when its ubiquitous operating system seemed to give it unassailable power?  Microsoft is now the weakling, admitting it needs help competing with Google in search and also in areas from email to Web browsers. And while Google is “dominant” for now, what Google dominates is an open Internet where barriers to entry are low and falling.Indeed, regulators will have a hard time even defining the market they’re reviewing for competitiveness. Saying that Google has 65% of a market is misleading. The Web is about people finding what they want. This could mean searches for information, but increasingly it means looking to see what friends or colleagues think about a topic. Google, Yahoo and Microsoft are social-media laggards compared with Facebook and Twitter, which provide new organizing networks for information online.  Instead of more aggressive enforcement of a legal relic, the real question is when will technology’s ever faster cycles of creative destruction spell the end of antitrust law? Consumers benefit from competition, innovation and new technology, which regulation cannot provide but can suppress. Instead of using 19th-century tools for this century’s challenges, President Obama should tell his regulators to study the humility of technologists who understand that today’s leader can be tomorrow’s laggard.

While I’m a believer in cartel enforcement and would like to believe will go wherever the evidence in a particular merger case would take me, I am a skeptic about monopolization enforcement.  But not generally for these institutional reasons (which is not to say they don’t present real problems).  Rather, I’m not convinced that economics has generated the technology for enforcement agencies and judges to consistently and accurately identify instances of anticompetitive single firm conduct without substantial risk of false positives that might swamp any gains.  I admit, the existing evidence on single firm conduct is limited.  Its an area where a lot of work must be done.  But my view of that evidence is that the appropriate default presumption is that single firm conduct is pro-competitive until convincingly demonstrated to the contrary.  We simply are not that good at distinguishing between pro-competitive and anti-competitive single firm conduct and in the absence of strong evidence of consumer harm, given the risk of false positives, the right approach is humility and caution.  This is the essence of the error cost approach and the core of the problem with repudiating the Section 2 Report in favor of the “tried and true” old case law in this area.

Note that these problems are not limited to single firm conduct cases in the new economy.  But in my view, to the extent that the “new economy” requires recalibration of the scales, it tips in favor of more humility not less in these markets since (1) they involve innovation and errors are more likely to significantly hamper economic growth in those industries, and (2) cases involving rule of reason analysis in innovative industries is likely to require tradeoffs between multiple dimensions of competition (e.g. price and innovation) and translating them into predictions concerning consumer welfare.  I have some Demsetzian concerns about our ability to do the second of these which I’ve written up in a paper in an earlier GMU/Microsoft Conference on the Law and Economics of Innovation which I’ll be posting shortly.

Posted in antitrust, economics, google, technology | Comments Off

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